Volatility Captive to Fed

Terry Flanagan

Low stock-market volatility is expected to continue as long as the U.S. Federal Reserve and other central banks continue their easy-money policies of low interest rates and liquidity injections.

“Volatility is a function of liquidity,” said Paul Jiganti, managing director of market structure at TD Ameritrade. “As long as interest rates are at historic lows and there’s so much cash out there with few other places to go, it seems that volatility is likely to stay low until that spigot of liquidity is cut off.”

The CBOE Volatility Index (VIX) has mostly hovered around the low teens in 2013 and 2014, with occasional — and short-lived — spikes to as high as 20 or 21. In prior years, the volatility gauge was more typically found in the 20s. The VIX was at 15.25 on Friday, Sept. 26, up from 13.5 earlier in the week.

Jiganti spoke on the Volatility in Focus panel at Markets Media’s Chicago Trading and Investing conference, held Sept. 23 at City Winery in Chicago.

One panelist raised the point that while the VIX level is “optically” low, the reading is not necessarily low when considered on a fair-value basis. Ultimately, whether VIX is perceived as low or not depends on one’s view of how smooth will be the unwind of the Fed’s massive quantitative easing program

Paul Jiganti, TD Ameritrade

Paul Jiganti, TD Ameritrade

Another point of debate on the panel was about whether volatility is an asset class. If you define an asset class as something where you get positive long-term expected return from a passive portfolio, then the answer is yes – if you are short volatility,” said Paul Stephens, vice president and head of institutional and international marketing and CBOE.

To be sure, the equity market isn’t the only place to look for the price fluctuations that are the  bread and butter of active traders.

“We trade across 70 global futures market spanning the seven main sectors,” said Tom Rollinger, chief investment officer of Red Rock Capital, a systematic global macro hedge fund. “Outside of equities, commodities and metals have been spiking in volatility, and energy and currencies have been showing directional volatility. Some directional CTAs (Commodity Trading Advisors) are doing well.”

Retail traders are warming up to volatility — Jiganti said TD Ameritrade’s retail vol trades are up 28% in 2014 compared with the same period last year. Increasingly, volatility-related transactions are being sent via hand-held devices.

“For our retail traders, mobile usage was 5% a few years ago, and it’s 15% now. We project it will be 50% by 2017,” Jiganti said at the Chicago conference. “It used to be only very simple orders on mobile, but now it’s possible to do even complex options strategies from your phone while walking down the hall. It’s opening up to more complex asset classes.”

The panel closed on the topic of volatility education. It was said that the industry offers ample education, but there’s always more to do. Also, many retail traders remain in the dark as to how to express a view on market volatility, a knowledge gap that represents an opportunity for the industry.

Still, education has come a long way from a decade ago, when Stephens of CBOE would explain options at some industry events using imaginary ‘Mr. Put’ and ‘Mr. Call’ characters.“I can’t do that anymore,” he said. “It’s a different world than it was 10 years ago in terms of knowledge levels.”

Featured image via Eisenhans/Dollar Photo Club

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